Policy Article

Italy at the limit of its financial capability? (original publication in German)

Kiel Policy Briefs, 118

This paper projects government interest payments as a percentage of GDP for Germany, France, Italy and Spain until 2032. To this end, we take into account the debt structure of currently circulating bonds, develop macroeconomic projections for GDP and the budget balance, and derive scenarios for the interest rate path, its term structure and country risk spreads. Italy is both vulnerable to a normalization of monetary policy at present risk spreads as well as to a further substantial widening of recently observed spreads. In case of an escalation of the conflict over the budget, Italy would likely not be able to access financial assistance via the rescue mechanism. Under increasing pressure from financial markets, the Italian government would be forced to revise its spending plans. Finally, if the government reaches a compromise with the European Commission, the interest rate spread might as well decline soon.